Politics

A Rant about Long Run Problems and Passe Solutions

Zachary Bartsch5 Comments

If you listen to or read major economists discussing what they think are big-picture problems, then their list usually includes three topics: Fertility, Culture, & the Fiscal Health.  On the wonkier side, you’ll also hear that housing scarcity and affordability is a problem, but let’s stick with the first three.

Fertility

People are deciding to have fewer children for a variety of reasons. In no particular order, the reasons include greater access to financial institutions, more popular female education, higher female wages, lower infant mortality, and falling religiosity. Some also speculate that housing affordability, safety regulations, and social safety nets contribute too.

What’s wrong with lower fertility? In an objective sense, there is nothing wrong. But, in the sense that people value similar things, we are in somewhat uncharted territory. Realized fertility is dropping across the globe. We know that economies of scale increase productivity and real wages. We also know that technological innovation comes from having more minds engaged with economic problems. It’s possible that labor productivity rises faster than the productivity that we lose with smaller scale, but it’s an open question. What happens to the liberal societies and polities when the liberals fail to persist? These are big geopolitical concerns.

Culture

People seem to be more fragmented religiously and culturally. Social scientists used to discuss Judeo-Christian norms more often. Sometimes you’d hear about English or Roman legal tradition or enlightenment values. But now, there seems to be very little in terms of common social cohesion. In the USA, the general common culture seems to be ‘smile and be nice’. That’s not the worst common rule, but it’s not enough to hang our hat on for a capable liberal state.

The lack of cultural cohesion isn’t my own particular concern – public intellectuals in economics and elsewhere feel like there is a problem. There is a mix of reasoning behind the concern. Some people are worried about transmitting values to the next generation, some are worried about how people behave when no one’s watching, and still others are worried about simply lacking a Schelling  point that coordinates large scale economic cooperation.

Fiscal Health

Continue reading →

Making Friends In Politics Is Possible

James BaileyLeave a comment

I knew getting involved in politics was a great way to make enemies, but it never occurred to me until I saw it in action that it can also be a way to make friends.

I’m still not very involved, even as academics go. I think many of us are a bit too eager to talk about political issues in general, but too slow to engage with the policy process in areas directly tied to our research. It’s hard to keep track of every relevant bill and proposed regulation, but I think we bring the most value when we’re the 3rd person to weigh in to share what the research says on an obscure topic, rather than the 3000th person to weigh in on a hot-button issue with a take that sounds just like everyone else on the same side.

My biggest surprise when testifying in state legislatures or public hearings has been that friends follow through while opponents don’t. People who disagree with me will say so at the time, then leave it at that. But people who agree with me will follow up afterwards with messages like “thanks for saying that” or “let’s get coffee”, or let me know when related issues come up.

Perhaps this is unusual, just some good luck in a small sample size, or a reflection of the fact that I only weigh in on relatively obscure issues far from the culture war. But again, I never even thought of this as a possibility. I still wouldn’t run for office any time soon. But if this wasn’t already obvious to everyone else, I encourage you to add this as one term in your own equation as you weigh the pros and cons of political engagement: “nudge the policy process in directions you like” + “engagement takes time and energy and makes enemies” + “maybe friends too”.

Is a US Oil Export Ban Coming?

James Bailey3 Comments

The Iran regime’s military strategy seems to be that by bombing the oil infrastructure of their neighbors and neutral shipping, US gasoline prices will go so high that Americans will demand an end to the war.

How many Americans would be willing to pay $6/gallon gas for months for a ~50% chance of toppling a regime that oppresses 90 million people and destabilizes its region on the other side of the world? Probably only a minority of voters, especially when the President didn’t make the case to the American people or Congress beforehand.

But the US produces more than enough oil for its own needs. Why does the Strait of Hormuz being closed mean higher gas prices here? Only because US oil companies can sell to global markets, and they won’t choose to sell a barrel of oil to a US refiner for $60 when they could sell it to a foreign refiner for $100. If the government took away the foreign option, US oil producers would sell to US refiners at prices consistent with pre-war sub-$3/gallon gasoline.

Naturally there would be costs to an export ban. US oil producers would miss out on windfall profits, while Russian producers would benefit. Foreign customers of US oil, many of them in allied countries, would be angered by the missed shipments and global oil prices would soar further.

But if the US administration wants to avoid a midterm wipeout driven by high gas prices, I see only 3 options:

  1. Get lucky and see the Iranian regime fall quickly
  2. Negotiate an end to the war quickly (which might itself be unpopular if they can’t get a good deal) or just declare victory and go home (but its not clear whether Iran would re-open the strait now just because the US stopped bombing)
  3. Restrict Exports

I say “restrict” not “ban” because I don’t think a complete export ban is necessary to stabilize US prices. You could instead do an export tax (high enough to stop many exports but low enough to allow the buyers with the highest values / fewest alternatives to stay in the market), or you could do a ban but allow a few export waivers for favored buyers or sellers (which seems like Trump’s style), or similarly a quota limiting exports to a certain number (say, limit each company’s monthly exports to 90% of their volume in the same month last year).

This has an obvious precedent: the Biden administration stopped issuing new permits to export liquified natural gas in 2024 to prevent prices spiking here during the Ukraine war (which led to even higher prices for our European allies). But a total ban on oil exports would be a much bigger deal.

Will the Trump administration actually try something like this? It will be an interesting test of US political economy to see what happens when the interests of the military-industrial complex conflict with the interests of oil producers.

Iran on Markets, Markets on Iran

James BaileyLeave a comment

We’re bombing Iran, and Iran is now bombing most of its neighbors. Oil prices are up ~20% since the bombing began last weekend, and stocks are down.

Iranian “Supreme Leader” Khamenei is now dead. Prediction markets sort of saw this coming; I mentioned here a month ago that markets thought it more likely than not that Khamenei would be “out of office” this year.1

Real-money US-regulated exchanges can’t directly cover the war, but others can and do, such as the international Polymarket:

Polymarket’s argument for why they offer these markets

This market shows that regime change is likely, but will take time- a 51% chance by the end of the year, but only a 13% chance by the end of the month.

How would this be achieved? Markets see a 60% chance that there will be US troops in Iran this year, though this market could be triggered by just a few special forces operators, or by troops visiting for humanitarian purposes after domestically-driven regime change. There will likely be a US-Iran ceasefire by the end of May. It’s not clear at all who will be running Iran at the end of the year:

Iran is far from the only country whose future leadership is unclear. Last month I noted that the current leaders of Britain, Hungary, and Cuba would likely be out of office by year end. These are all now looking even more likely than they did a month ago:

So I’ll repeat:

Myself, I find most of these market odds to be high, and I’m tempted to make the “nothing ever happens” trade and bet that everyone stays in office. But even if all these markets are 10pp high, it still implies quite an eventful year ahead. Prepare accordingly.

  1. US-regulated exchanges can’t offer markets on death. Kalshi’s rules stated that if Khamenei died, the market would refund everyone at current prices rather than paying as if he were “out of office”. When he died many people got mad at Kalshi- some who had bet he’d be “out of office” and were mad that they weren’t paid at 100%, others that Kalshi was offering something too close to a death market- “how else would he lose power” (even though Maduro and Assad provide clear recent examples) ↩︎

Regulatory Burden By Presidential Administration

Zachary Bartsch1 Comment

During president Trump’s first term in office, he made a bunch of waves (as he’s wont to do). His more educated supporters said that he engaged in substantial deregulation of telecommunications, which got a lot of press. There was a quiet contingent of educated voters who were relatively silently supportive on Trump’s regulatory policy, even if his character was indefensible or his other policy was less desirable.

But was Trump a great deregulator? Or was it one of those cases when we say that he regulated *less* than his fellow executives? The George Washington University Regulatory Studies Center can help shed some light with their data. Specifically, they have calculated the number of ‘economically significant’ regulations passed during each month of each president going back through Ronald Reagan’s term. What counts as ‘economically significant’? The definition has changed over time. But, generally, ‘economically significant’ regulations:

  1. “Have an annual [adverse] effect on the economy of $100 million or more
  2. Or, adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.”

The only exception to this is between April 6, 2023 and January 20, 2025 when the threshold was raised to $200 million.

The Data

The graph below-left shows the number of economically significant regulations for each president since the start of his term, through July of 2025. It’s reproduced from the link above except that I appended Trump’s second term onto his first term. What does the graph tell us? There doesn’t seem to be much of a difference between republicans and democrats. Rather, it seems that, generally, the number of economically significant regulations increases over time. Importantly, the below lines are cumulative by president. So each year’s regulations each cost $100m annually and that’s on top of the existing ones already in place. So, regulatory costs generally rise, with the caveat that we don’t see the relief provided by small or rescinded regulations (for that matter, we don’t see small regulatory burdens here either). Something else that the below graph tells us is that presidents tend to accelerate their economically significant regulations prior to leaving office. Reagan was the only exception to this pattern and he *slowed* the number of regulations as the end of his term approached.

Below-right is the same data, but the x-axis is months until leaving office. Every president since Bush-41 has accelerated their burdensome regulations during their final months in office. The timing of the acceleration corresponds to how close the preceding election was and whether the incumbent president lost. Whereas all presidents regulate more in their last 2-3 months in office, the presidents who were less likely to win re-election started regulating more starting around eight months prior to leaving office. Of course, they wouldn’t say that they expected to lose, but they sure regulated like there was no tomorrow.

What about Trump? Trump’s fewer regulations is caused by his single term. He definitely still added to the regulatory burden (among economically significant regulations, anyway). While Trump started with the fewest additional regulations since Reagan, and Biden started with the most ever initial regulations, together they earn the top prizes for most regulations added in their first term.

What if we append these regulations from end-to-end? That’s what the below chart does. We do have to be careful because the series is a measure of gross economically significant regulations and not net economically significant regulations. So, it’s possible that some rescissions dampened the below values, but this is the data that I have for the moment. While each presidential administrations increases regulation more than the prior, the good news is that the rate of change is not exponential. The line of best fit is quadratic. We’re experiencing growing regulations, but at least it’s not compound growth.

The Cost

We can estimate the costs of these economically significant regulations. It’s a rough cut, and definitely a lower bound since rescission is rare and $100 million is itself a lower bound, but we can multiply the number of regulations by $100m to get minimum annual cost. Like I said, the Biden criterion from April 2023 through January 20, 2025 changed, so those regulations get counted as $200 million instead. The change in definition means that the regulation counts underestimate the late-term Biden regulations relative to the other presidencies.

Continue reading →

Commodity Sports

James BaileyLeave a comment

I’m trying to coin “Commodity Sports” as the term to refer to sports betting that takes place on exchanges regulated by the US Commodity Futures Trading Commission, as opposed to sports betting that takes place through casinos regulated by state gaming commissions. So far it seems to be working alright, I haven’t convinced Gemini but have got the top spot in traditional Google search:

That article- Will Commodity Sports Last?– is my first at EconLog. I’m happy to get a piece onto one of the oldest economics blogs, one where I was reading Arnold Kling’s takes on the Great Recession in real time, where I was introduced to Bryan Caplan’s writing before I read his books, and where Scott Sumner wrote for many years (though I started reading him at The Money Illusion before that).

The key idea of the piece, other than the legal oddity of sports betting sharing a legal category with corn futures, is that the Commodity Sports category is being pioneered by prediction markets like Kalshi. As readers here will know, I like prediction markets:

I love that CFTC-regulated exchanges like Kalshi and Polymarket are bringing prediction markets to the mainstream. The true value of prediction markets is to aggregate information dispersed across the world into a single number that represents the most accurate forecast of the future.

But I’m not so excited to see them expanding into sports:

Although I see huge value in prediction markets when they are offering more accurate forecasts on important issues that help policymakers, businesses, and individuals make more informed plans for our future (e.g., Which world leaders will leave office this year?, or Which countries will have a recession?)… I see much less value in having a more accurate forecast of how many receptions Jaxon Smith-Njigba will have.

Like Robin Hanson, I worry that the legal battles against Commodity Sports and the brewing cultural backlash against sports betting risk taking the most informative prediction markets down along with it.

The full piece is here.

Forecasting An Eventful 2026

James Bailey1 Comment

May you live in interesting times – apocryphal Chinese curse

In early 2025 I shared forecasts about the economy that turned out to be pretty good. This year, economic forecasts center around a boringly decent year (2.6% GDP growth, inflation below 3%, unemployment stays below 5%, no recession), though with high variance. But forecasts about politics and war foretell a turbulent year.

In the US, midterm elections have a 78% chance to flip control of the House and 35% chance to flip the Senate despite a tough map for Democrats. A midterm wave for the out-of-power party is typical in the US, given that the party in power always seems to over-play their hand and voters quickly get sick them. More surprising is that forecasters give a 44% chance that Donald Trump leaves office before his term is up, and a 16% chance that he leaves office this year. Markets give a 20% chance that he will be removed from office through the impeachment process, so the rest of the 44% would be from health issues or voluntary resignation.

Forecasters at Kalshi predict a greater than even chance that 4 notable world leaders leave office this year:

I find this especially notable because Viktor Orban is the only one who would be removed through regularly scheduled elections. In the UK, Keir Starmer was just elected Prime Minister in 2024 and doesn’t have to face reelection until 2029; but he is so unpopular that his own Labor Party is likely to kick him out of office if local elections in May go as badly as polls indicate. If so, he would join Boris Johnson and Liz Truss as the third British PM in four years to leave office without directly losing an election. The leaders of Cuba and Iran don’t face real elections and would presumably be pushed out by a popular uprising or US military action.

Some other important world leaders will probably stay in office this year, but forecasters still think there is a significant chance they leave: Israel’s Netanyahu (49%), Ukraine’s Zelenskyy (32%), and Russia’s Putin (14%). For the latter two, this belief could be tied to the surprisingly high odds given to a ceasefire in the Russia-Ukraine war this year (45%). Orban leaving office could be tied into this, as Hungary has often vetoed EU support for Ukraine.

Myself, I find most of these market odds to be high, and I’m tempted to make the “nothing ever happens” trade and bet that everyone stays in office. But even if all these markets are 10pp high, it still implies quite an eventful year ahead. Prepare accordingly.

Unweighted Bayesians get Eaten By Wolves

mdmakowskyLeave a comment

A village charges a boy with watching the flock and raising the alarm if wolves show up. The boy decides to have a little fun and shout out false alarms, much to the chagrin of the villagers. Then an actual wolf shows up, the boy shouts his warning, but the villagers are proper Bayesians who, having learned from their mistakes, ignore the boy. The wolves have a field day, eating the flock, the boy, and his entire village.

I may have augmented Aesop’s classic fable with that last bit.

The boy is certainly a crushing failure at his job, but here’s the thing: the village is equally foolish, if not more so. The boy revealed his type, he’s bad at his job, but the village failed to react accordingly. They updated their beliefs but not their institutions. “We were good Bayesians” will look great on their tombstones.

They had three options.

A) Update their belief about the boy and ignore him.

This is what they did and look where that got them. Nine out of ten wolves agree that Good Bayesians are nutritious and delicious.

B) Update their beliefs about the boy, but continue to check on the flock when the boy raises the alarm.

They should have weighted their responses. Much like Pascal taking religion seriously because eternal torment was such a big punishment, you have to weight you expected probability of truth in the alarm against the scale of the downside if it is true. You can’t risk being wrong when it comes to existential threats.

C) Update their beliefs about the boy and immediately replace him with someone more reliable.

It’s all fine and good to be right about the boy being a lying jerk but that doesn’t fix your problem. You need to replace him with someone who can reliably do the job.

So this is a post about fascism. Some think that fascism is already here, others dismiss this as alarmism, others splititng the difference claiming that we are in some state of semi- or quasi-fascism. Within the claims that it is all alarmism, what I hear are the echoes of villagers annoyed by 50 years of claims that conservative politics were riddled with fascism, that Republicans were fascists, that everything they didn’t like was neoliberalism, fascism, or neoliberal fascism. Get called a wolf enough times and you might stop believing that wolves even exist.

Even if I am sympathetic, that doesn’t get you off the hook. It hasn’t been fascism for 50 years will look pretty on your tombstone.

Let’s return to our options

  • A) Don’t believe the people who have been shouting about fascism for years, but take seriously new voices raising the alarm.
  • B) Find a set of people who, exogenous to current events, you would and do trust and take their warnings seriously.
  • C) Don’t believe anyone who shouts fascism, because shouting fascism is itself evidence they are non-serious people.
  • D) Start monitoring the world yourself

Both A) and B) are sensible choices! If you’ve Bayesian updated yourself into not trusting claims of fascism from wide swaths of the commentariat, political leaders, and broader public, that’s fine, but you’ve got to find someone you trust. And if that leads you to a null set, then D) you’re going to have to do it yourself. Good luck with that. It takes a lot of time, expertise, and discipline not to end up the fascism-equivalent of an anti-vaxxer who “did their own research.”

Because let me tell you, C) is the route to perdition in all things Bayesian. Once your beliefs are mired in a recursive loop of confirmation bias, it’s all downhill. Every day will be just a little dumber than the one before. And that’s the real Orwellian curse of fascism.

Drawbacks of Long Term Thinking

Zachary BartschLeave a comment

This post is just some thoughts about perspective. I apologize for any lack of organization.

My academic influences include North, Weingast, Coase, Hayek, the field of Public Choice, and others. I’m not an ‘adherent’ to any school of thought. Those guys just provided some insights that I find myself often using.

What lessons did they teach? Plenty. When I see the world of firms, governments, and other institutions, I maintain a sharp distinction between intention and outcome. Any given policy that’s enacted is probably not the welfare maximizing one, but rather must keep special interests relatively happy. So, the presence of special interests is a given and doesn’t get me riled up. When I see an imperfect policy outcome, I think about who had to be enticed to vote for it. We live in a world where ‘first bests’ aren’t usually on the table.

Historically, or in lower income countries, I think about violence. Their rules and laws are not operating in a vacuum of peaceful consent. There is always the threat of violence. Laws are enforced (or not) conditional on whether and what type of violence that may result. All of the ideal legislation is irrelevant if theft and fraud are the lay of the land.

I think about institutional evolution with both internal and external pressures. I’m a bit worried about the persistence of the US republic, or at least worried for its pro-growth policies. I’m not worried about China in the long run. I don’t think they have the institutions that get them to ‘high income’ status. I do think that they are a tactical concern in the short run and that the government does/will have access to great volumes of resources in the medium run. That’s a bit of a concern. But like I said, I’m not super worried in the long run.

Continue reading →

Did Federal Government Spending Shrink in 2025?

Jeremy HorpedahlLeave a comment

One of the major goals of the new Trump administration, particularly the DOGE unit, was to shrink the size of the federal government’s budget. Did they achieve this goal?

Last spring both my co-blogger Zachary and I pointed to a tool from the Brookings Institution to track federal spending, pulling in data directly from the US Treasury in a convenient format. Back in March I said “this will be a useful tool to follow going forward.” Now we have a full year of spending data for 2025.

When we look at total spending for Calendar Year 2025, it was about $318 billion higher than 2024, or about 4 percent higher. So, it seems that by that measure, the cuts that the Trump administration made were too small to overcome the other areas that grew.

But…

It may be more useful to remove some spending from the equation. In particular, entitlement programs and interest spending are very large spending categories that aren’t subject to the annual budgeting process. Of course, any program is ultimately under the control of Congress, so it’s a little bit of a cheat to remove Social Security and Medicare, but those programs are on autopilot with respect to the annual federal budget process. They are worth talking about, but they are probably worth talking about separately (especially because they have their own funding mechanisms). And interest on the debt isn’t something a President can control directly: it can only be reduced in future years by closing the budget gap today.

Removing those programs — which constitute about $4.8 trillion of the $7.9 trillion in 2025 spending (so a lot!) — gives you this chart (note: figures have been slightly updated with more complete data since I originally posted this chart):

Federal spending by this measure was about $85 Billion lower in 2025 than the prior year, or about 5 percent. And that’s in nominal terms: it is an even bigger cut if we adjust for inflation. Notice too that the pattern fits what we might expect: spending was slightly higher in the first half of the year (before any Trump changes could have had much of an effect), almost exactly equal for most of the second half, and then slightly below once we get to November and December (after the Deferred Resignation Program layoffs in October). If we ignore the first two months of the year (when it would have been really hard for Trump to have an effect), the drop in spending is about 8 percent.

What were the biggest cuts that led to the $85 billion drop? Keep in mind that some programs increased spending, such as military spending, so there are more than $85 billion in cuts. Using the Daily Treasury Statement categories, here are the big ones:

  • Federal Financing Bank (Treasury): $59 billion
  • Department of Education: $46.8 billion
  • USAID: $30.2 billion
  • EPA: $17 billion (though EPA seems to have gone on a spending binge at the end of 2024. Compared with 2023, the first Trump year was 50% higher!)
  • Federal Employee Insurance Payment (OPM): $16.3 billion
  • Pension Benefit Guarantee Corporation: $11.3 billion
  • Department of State: $8.6 billion
  • Food Stamps (USDA SNAP): $4 billion
  • CDC: $3.7 billion
  • Crop Insurance Fund (USDA): $3.1 billion
  • USDA Loan Payments: $2.7 billion
  • Independent Agencies: $2.6 billion
  • FCC: $1.8 billion
  • NIH: $1.2 billion
  • US Postal Service: $1.1 billion

Those are all the programs I could find that declined by at least $1 billion, totaling a little over $200 billion. There were some other highly salient cuts that were under a billion dollars (such as the Corporation for Public Broadcasting, which was completely eliminated). Looking at that list I don’t think there is an easy way to sum up a “theme,” but I think the real theme is that if the Trump administration wants 2026 discretionary spending to be even lower than 2025, they will really need some major action from Congress. These cuts are mostly low-hanging fruit, and some are long-running goals of the GOP (such as Dept. of Education, foreign aid, and public television).

Of course, to really get federal spending under control, Congress will have to tackle entitlement reform and shrink the budget deficit to lower interest costs. Social Security, Medicare, and interest payments — the bulk of federal spending, over 60% of the total — increase by 9% in 2025. Again, it was probably unreasonable to expect Trump and Congress to have done anything major with them in a single year, but something must be done soon: the Social Security Old Age trust fund will be depleted in about 8 years, and the Medicare Part A trust fund will be depleted in about 10 years.